In a medium saucepan, cook oil, onion,pepper, and taco seasoning on medium-low heat for 3 minutes.
Add milk and water. Slowly bring to a boil, then lower the heat to a simmer.
Stir in pasta. Cover and cook for 7 minutes, stir. Replace cover and cook for another 6 minutes.
Turn off heat. Stir in the cheeses.Cover the pot and let stand for 5 minutes before serving.